Samsung’s market share has declined from a third in 2013 to a fifth today, as its mid-market positioning leaves it without a clear value proposition for consumers

China’s Top 3 players have meanwhile soared from just a 12% market share to 29% today, powered by their low-cost positioning

Apple’s market share has remained very stable, as it has focused on the top end of the market, prioritising price over volume

“Others”, also usually without a clear value proposition, have seen their share drop to just 36% from a peak of 46% in Q3 2016

China remains the world’s largest smartphone market, with 103 million phones sold in Q3. But its volume was down 8% compared to Q3 2017, as the stimulus programmes continue to slow. As the Counterpoint chart shows, the market is now consolidating around a few winners:

Huawei are emerging as the market leader with a 23% share

Vivo and Oppo remain key challengers at 21%

But “Others” have dropped to 13%, and Samsung has almost disappeared at just 1%

As Counterpoint note, the top 5 brands now hold 86% of the market:

“The Chinese smartphone market is saturated with accelerated market consolidation. The competition in 2018 is almost a zero-sum game for the top five players. It is challenging however, even for the leading brands to create clear product differentiation. In Q3, only Huawei and vivo managed to achieve positive YoY growth among the top 5 brands.”

Meanwhile, of course, Apple continue to dominate the premium segment after the launch of the new iPhones in September.

This divergence between low-cost and premium will no doubt spread across the rest of the global market as the downturn continues. And the main growth is likely to be in the low-cost area.

India, for example, saw volume grew 5% versus Q3 2017. But with average per capita income less than $2000, price is all-important. Reliance Jio’s ultra-low pricing strategy has been critical in making bandwidth affordable, and there are now over 400 million smartphone users in the country.

But iPhone sales are actually falling, and will be down by a third to just 2 million this year. Functional phones in the $150-$250 price segment are driving sales growth, via online sales. Q4 is expected to see these grow 65% to reach 50 million, due to their 50%-60% discounts.

The smartphone market thus continues to confirm that the BabyBoomer-led SuperCycle is over. As the chart shows, this created a new and highly profitable mid-market from the mid-1980s:

Before then, companies had competed on the basis of price or perceived value

But from the mid-1980s onwards, the mid-market became the most profitable sector

Now, with the Boomers retiring and stimulus programmes ended, we are going back to basics again

Instead, the market is segmenting again on the basis of price or perceived value. Chinese players compete on price, while Apple focuses on profit and is moving up-market. this means that previously profitable market leaders such as Samsung are slowly disappearing along with the mid-market segment that they supplied.

These very different strategies highlight the new world ahead for consumer markets and those who supply them.

Global smartphone sales have seen major growth until recently as consumers fell in love with going mobile, as the chart shows:

In the critical Q4 period they jumped from 290m in 2013 to 380m in 2014, 405m in 2015 and 439m in 2016

But they then fell 9% in Q4 last year, according to Strategy Analytics data. They note that:

“It was the biggest annual fall in smartphone history (and) …. was caused by a collapse in the huge China market, where demand fell 16% annually due to longer replacement rates, fewer operator subsidies and a general lack of wow models.”

Even more revealing was that only Xiaomi of the Top 5 vendors increased their volume. Apple lost 1m sales, Samsung lost 3m, Huawei lost 4m, whilst even OPPO only managed to maintain its volume. And Xiaomi only did well because they were recovering from their 2016 collapse, when their share crashed to just 3.35% from 5% in Q4 2015.

Chinese companies were, however, the real winners during 2017 as the price war intensified, as the second chart confirms:

China’s top 3 vendors now supply a quarter of the global market – compared to less than a tenth in 2013

Samsung have been the main loser, with their share falling from over a third of the market to less than a fifth

The rise of the Chinese vendors is great news for consumers, but very bad news for their competitors, as the third chart confirms. It highlights how revenues are now being squeezed for most vendors as the Chinese ramp up their volume. Only Apple has avoided the carnage by heading defiantly up-market, with its average handset price now close to $800.

The issue is the very different nature of the smartphone market in the major emerging economies, where incomes are much lower than in the West and it is very rare for carriers to subsidise handset sales over the life of the contract. In India, for example, the typical smartphone sells for less than $200, whilst Apple has less than 2% of the market.

2017 therefore marked a crucial turning point in the market, as I forecasted when reviewing 2016 data a year ago:

“The issue is that 3.1bn people now own smartphones, and the other 4.2bn can’t afford them. So inevitably, the market is going to focus more and more on price. Of course, millions of people will still want to own an iPhone or Galaxy. But price will become the deciding feature for many people.”

2018 seems likely to see pricing pressure intensify, now that the Chinese market has gone ex-growth. India is likely to be a critical battleground after Xiaomi’s success there in 2017, which was key to its nearly doubling global sales. As analysts IDC noted:

“Brands outside the Top 5 struggled to maintain momentum as value brands such as Honor, Vivo, Xiaomi, and OPPO offered incredible competition at the low end.”

OPPO is likely to be particularly aggressive as it saw no growth in 2017 after doubling its sales in 2016, whilst Xiaomi is unlikely to risk a second slip-up on volume. In turn, this makes it likely that Samsung’s mid-market positioning will come under major pressure from Chinese competition in key markets such as China and India.

Apple must now intensify its efforts to move into application-based markets such as healthcare and other services. It has been building its position over the past 3 years, and has a vast cash-pile from its smartphone profits to fund the necessary shift away from hardware sales. Samsung’s future looks less rosy, however, given that Chinese vendors have been able to produce smartphones for as little as $20 for the past 2 years.

And as I noted back in May 2015:

“The smartphone market is not alone is facing these New Normal challenges. They are coming to the online and High Street stores near all of us, if they haven’t already arrived.“

China’s Top 3 manufacturers – Huawei, OPPO and Vivo – captured top position in global smartphone sales for the first time in Q1. As the chart shows:

□ They took 22.9% of the market compared to 22.7% for Samsung and 14.4% for Apple
□ In terms of individual smartphone sales, OPPO’s R9s smartphone reached the No. 3 position worldwide
□ It was still behind Apple’s iPhone 7 and iPhone 7Plus, but ahead of Samsung’s aging Galaxy J3 and J5 models

“OPPO is largely unknown in the Western world, but its brand is wildly popular in China and growing rapidly across India. The R9s is OPPO’s flagship 4G device with key features such as dual-SIM connectivity and fingerprint security.”

“The issue is that 3.1bn people now own smartphones, and the other 4.2bn can’t afford them. So inevitably, the market is going to focus more and more on price. Of course, millions of people will still want to own an iPhone or Galaxy. But price will become the deciding feature for many people.”

The impact can be seen throughout the smartphone eco-system. Consolidation is the normal response when market growth begins to slow. As the second chart confirms, Q1 sales at 353m were only up 2% versus Q1 2015, when the global market began to plateau. The low-cost Chinese players are now gaining share in the mass-market versus Apple and Samsung as premium pricing disappears, and the micro-vendors are also being squeeezed:

□ This price pressure led to Apple losing out in China to cheaper models with similar features
□ The “Top 100+” micro-vendors were also squeezed, and were collectively down 8% versus Q1 2016
□ The success of low-cost larger producers meant the “Top 30+” gained 8% versus Q1 2016

Samsung are most at risk at the moment, as they recover from the Galaxy Note 7 problems. Their sales fell around 60% in China – the world’s largest market. They are now launching the new Galaxy S8 model to rebuild their position, but will also face strong competition in H2 with Apple’s 10th anniversary iPhone.

The same process of consolidation has, of course, already played out in the smartphone software market, where Google’s Android system is now the dominant player. It has 86% of the market, with only Apple’s iOS system (14%) still competing against it. Apple therefore has to get everything right with the 10th anniversary iPhone – if it fails to excite, then Apple’s entire business model of combining hardware with software will be at risk.

The outlook is becoming clearer for the global smartphone market, and it confirms my judgement in November, when reviewing Q3 sales:

“It seems likely that a focus on price and affordability will come to dominate. In turn, pricing pressures on suppliers will intensify. The key challenge facing the market is that it has gone ex-growth.”

As the two charts show:

□ 2016 sales rose just 3% versus 2015, well down on the 12% growth in 2015 and 30% growth in 2014
□ Both Samsung and Apple saw their market share decline – since 2013, Samsung has fallen from 32% to 21%; Apple has slipped from 15.5% to 14.5%
□ The 3 main Chinese suppliers had a record year – Huawei with 9.3%, and Vivo and OPPO each with 4.8%
□ In the crucial Q4 period, their combined market share was higher than either Samsung or Apple at 22.7% – the highest ever seen

Chinese manufacturers are therefore likely to be the major winners in the future. Their individual positions have changed over the years, as fierce competition took its toll on companies such as Lenovo and Xiaomi. But as the second chart highlights, Q4 suggests the Top 3 Chinese players are now starting to collectively outsell both Samsung and Apple.

The issue is that 3.1bn people now own smartphones, and the other 4.2bn can’t afford them. So inevitably, the market is going to focus more and more on price. Of course, millions of people will still want to own an iPhone or Galaxy. But especially as the world moves into recession, price will become the deciding feature for many people.

Regional sales volumes also suggest that we have reached a turning point:

□ China accounts for around a third of global smartphone sales, and Apple’s Q4 revenue was down 12% in the Greater China region. This highlights once again its failure to introduce a more competitively priced model to compete with local suppliers.

□ Apple’s position in India, the other key emerging market, is even worse. As recently as 3 years ago, Apple had planned to be selling 10 million iPhones in India by now. But as in China, its insistence on maintaining Western pricing models means its growth has stalled. Apple sold just 800k-900k iPhones in Q4, and like other manufacturers has been badly hit by premier Modi’s demonetisation programme. Most Indian phones are bought with cash, and Apple’s sales have since collapsed by 30% – 35%. This is also a major issue for the entire industry, which had been expecting to profit from the launch of Reliance’s new Jio service. This offers free 4G data service until the end of March and has already gained 72 million users.

□ Sales in other major markets have clearly plateaued. W Europe was down 3% in Q4, with Germany and France down 10%. The US only managed a 3% rise, after a fall in Q3, despite high levels of promotional activity. Russia stood out with a 10% rise in demand in 2016 as the currency stabilised with the oil price. But sales in Latin America were down 1%, and the Middle East/Africa was up just 1%.

Essentially the market has now become saturated, with price likely to become the main competitive weapon.

Samsung and Apple may hope for some gains as 4G and 5G networks are rolled out, but 2017 is likely to see profit margins under pressure from Chinese competition everywhere – for manufacturers and their suppliers.

There was no great surprise in the news that global smartphone sales fell for the first time ever in Q1. As I suggested in February, when reviewing Q4 data:

“It seems almost inevitable that global growth will now follow China and go negative”.

As the chart shows, Strategy Analytics data suggests that sales fell 3% in Q1, making it the first time that smartphone sales have shrunk on an annualised basis since sales began in 1996. Equally important is that competitive pressures are rising, particularly in the world’s largest market, China. As Bloomberg note:

“Smartphones are no longer novelties in China, and most domestic brands target the mid- and low-price ranges, where buyers don’t upgrade as frequently as those for high-end Apple and Samsung phones.”

Apple was worst hit by the downturn, particularly in China. This used to be its fastest-growing market, but sales plunged 26% in Q1, as China Daily reported:

“Full-fledged local brands such as Huawei and Xiaomi are pushing high-end smartphones, targeting customers seeking quality products that are priced a few hundred bucks cheaper.”

What puzzles me is the behaviour of financial markets over the past 3 months, given that the downturn was almost inevitable as the headlines from my last 3 quarterly posts suggest:

Why then, one wonders, did Apple’s share price rally by 17%, from $94 to $110, between 12 February and 1 April against this background? Apple’s shares have, of course, since collapsed back to $93 last night.

Clearly nobody really cared about the fundamentals of supply/demand. Instead, just as in China with its commodities rally over the same period, prices were pushed higher by another sudden surge in liquidity.

One factor was the US Federal Reserve’s sudden realisation that the US economy was far weaker that it had realised. Another was the Q1 lending bubble set off by China’s provinces as they battled to retain jobs by rescuing zombie companies. But now, there are growing signs that reality is breaking through again, as I suggested last month:

“Q1 saw a short-lived ‘Triumph of Illusion’, which may well now be followed in Q2 by a painful ‘Return to Reality’. This will confirm that the likely key lesson of the Illusion years is that ‘it is better to travel in hope, than to arrive’.”

We all now carry around a mini-computer in our pockets – one with more power than those which controlled Apollo 11 when Neil Amstrong first walked on the moon in 1969. In certain parts of the world, there are now more smartphones than toilets, according to Time magazine.

This is raising the spectre of market saturation in the world’s largest market:

In China, for example, there were 1.3bn users last year – virtually everyone now owns a smartphone

The length of the upgrade cycle there is rising from the previous 13 months, and sales actually fell 4% in Q4

Apple’s share price has fallen by a quarter in just 2 weeks, since reporting “signs of economic softness there”

ARM, the smartphone chip supplier, has seen its share dive 15% in the past 3 days

The chart above, based on Strategy Analytics data, highlights the problems ahead. The market had a record year in 2015, selling 1.44bn handsets. But growth rates have collapsed from 41% at the end of 2013 to 31% in 2014 and just 6% in Q4 2015. It seems almost inevitable that global growth will now follow China and go negative.

This will impact all the major suppliers. Apple has claimed 90%+ of total smartphone income in recent years, and it has a devoted fan base. But even the late Steve Jobs would probably now struggle to come up with “the next new thing” that would excite consumers to rush out and upgrade.

The problem is that the market has run out of potential demand. As I noted in November, there are 4.1bn people in the world who can’t afford a smartphone today. They are the people who have incomes of less than $5/day:

But the world’s 1000 smartphone suppliers won’t give up easily. Almost inevitably, therefore, we are heading for a major price war, as it is already possible to assemble smartphones for as little as $20.

As the chart shows, the 3 major Chinese players – Huawei, Lenovo and Xiaomi – now have had a global market share of 17.5%. And Samsung with its 20% share (down from 35% in Q3 2013), is clearly in their line of fire. But Apple is bound to be hit as well.

The smartphone market is also probably acting as a leading indicator for many other industries. It highlights how China’s slowdown means there is a vast amount of spare capacity in the world, which won’t ever be needed again.